In the recent crash, the independence of Bitcoin relative to other assets has been challenged as it dropped by more than the S&P500 index. Many are tempted to conclude that the diversification argument does not hold anymore, and that even cryptocurrencies have not been immune to the recent sell-off.
The research department of SEBA Bank has a different opinion, based on an analysis of three examples of financial stress with a focus on gold. This precious metal is an asset revered as a classic diversifier and, like Bitcoin, does not belong to the official monetary system.
Can Bitcoin be compared with gold over longer term?
During the financial crisis of 2008, gold crashed 30%, in parallel with equities. But after three months, the correlation disappeared and gold served as a diversifier again.
During the Black Monday crisis in 1987, the gold price went up in the beginning and then declined over several years while the opposite happened in the stock markets. An analysis of the dot-com bubble shows a high correlation during two to three months before gold and shares performed completely different for years.
Being a classical diversifier in the long run does not necessarily mean anti-correlation during the first days of a crisis.
Bitcoin is now experiencing its first global crisis. During the general run on liquidity, Bitcoin fell more than other markets which were supported by governments and central banks. After the sell-off, the correlation has declined. This behaviour is similar to what we have observed with gold and S&P 500 during the dot-com bubble burst.
“Does this mean that we know for certain that Bitcoin is going to bounce regardless of what happens to other asset classes?” asks Yves Longchamp, Head Research of SEBA Bank. “Absolutely not. Only it is premature to conclude that diversification does not work.”
Bitcoin had been pronounced dead 380 times before the recent crash by prominent personalities. This will be Bitcoin’s 381st death, according to Longchamp, “and it will be resurrected for the 381st time,” he argues.
Are cryptocurrencies resisting the crisis?
When measured against historical analysis of financial markets, cryptocurrencies are resisting the crisis. In 2020, stablecoins saw a steady rise of 20%, and during the recent sell-off, the demand for stablecoins has increased. Stablecoins are built on top of existing blockchains and are meant to help to minimize volatility in the price relative to a stable asset of basket of assets.
Stablecoins can be pegged to cryptocurrency, fiat money or even exchange-traded commodities. They were partly invented so that they could lean on the fluctuations of assets that sit outside the cryptocurrency space. Stablecoins that are backed by precious metals like gold or silver as less likely to be inflated than stablecoins backed by fiat money.
Further details of SEBA Bank’s analysis can be found here.